How J.C. Penney Is Killing Itself

In the following video, we speak with Roger Martin, strategy expert and dean of the Rotman School of Management at the University of Toronto. We discuss what Martin believes is J.C. Penney's fundamental strategic flaw, the fact that it's competing against itself with the new "store within a store" concept, and why he believes the company is doomed to fail.

A transcript follows the video.

The full interview with Roger Martin can be seenhere, in which we discuss a number of topics, including Bill Ackman, innovation, corporate responsibility, executive compensation, and how to pick out great companies. Martin is the co-author of Playing to Win, a new book focusing on strategy, written with former Procter & Gamble CEO A.G. Lafley.

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Brendan Byrnes: You know a thing or two about strategy, having helped turn around Procter & Gamble. I wanted to ask you about Bill Ackman and J.C. Penney. You wrote in a blog post recently that "Bill Ackman shows almost no evidence of understanding enough about strategy to turn around a company." What's he doing wrong?

Roger Martin: Well, I think he understands a whole lot about capital markets and a whole lot about how to make investors happy, but I'm not sure he knows how to make consumers -- customers -- happy in a way that brings about competitive advantage.

What I see with J.C. Penney is sort of a fallacy that I see often in the strategy of companies, which is that it's good enough to try to improve things. It's not. Improving is good, but only in the context of having a goal to have an advantage against competitors with some set of customers so that customers say, "I need this company."

If you just improve a company, you say, "I'm going to get their inventory turns up, or their sales per square foot up." That ends up often disappointing. I think that's, in some sense, what's happening at J.C. Penney.

They just announced a huge fourth-quarter loss. Same-story sales were down almost 30% in 2012, but the focus has been on, "Oh, we've got the new J.C. Penney" -- 10% of the stores are this new store within a store, and it's double the sales per square foot of the rest of J.C. Penney -- "so as soon as we get the stores converted over to 100% of this our sales per square foot," which were 130 apparently, and are 260 within the little store-within-a-store new J.C. Penney, "everything will be fine."

But that begs the question, "Who are you competing against?" I would argue that right now, the new J.C. Penney is competing against and absolutely slaughtering an important competitor, and it's called the old J.C. Penney.

The only way that sales per square foot can be up in the new J.C. Penney, that 10%, by that much, and sales per square foot for the store overall are down that much, is what? They're taking huge, huge amounts of sales away from the old J.C. Penney.

In due course, once they've destroyed the old J.C. Penney and got its sales per square foot down to zero, they're going to have to start taking share from somebody else. What I don't see is evidence that they have that in their mind, which is, "How are we going to beat Macy's, Nordstrom, Target," all the companies that one way or another they compete against.

That's strategy, having a where to play, how to win against competitors other than yourself.

Byrnes: J.C. Penney definitely has a strategy problem. Even bigger than that, it just seems like with declining mall traffic it's kind of an industry problem to some extent, although some of the other guys are doing much better, obviously -- Nordstrom and Macy's, you mentioned.

Can J.C. Penney survive with the competition from those big boys, and can they turn it around based on strategy?

Martin: I think you can always have a strategy to win in a certain way in a certain place. This is a particularly tough one, but the key is that without a strategy. I think the turnaround is actually doomed to fail.

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Today there are a myriad of satisfactory substitutes for everything that JCP offers. JCP's failure to move loyal shoppers successfully from their catalog business to on line is a major reason for loyal customer decline. Loyal customers are ambassadors for the brand. When this was disrupted a major portion of their audience for their new concept was lost. This now leaves them to create a whole new segment of new customers who really are not out there looking for a new store to replace their loyalty to Macys, Nordstrom, Wal-mart, etc. They have lost their point of difference. They should bring back sales every week, have a promotion every week and allow their new strategy to only apply to new line introductions. Start with loss leaders of old lines to get people back in, then introduce their new concept slowly over time. Consumers need to be led not pushed.

how many towns have a Macy's or Nordstroms? I live in a metro area of 250k people, and there's not a Macy's or Nordstrom's within 3 hours of here. I like JC Penneys. They have good clothes at good prices for me and my 6 year old. I hope they don't go out of business.

I have been a faithful JCP customer for many years. My customer loyalty was based on two things. 1. I am a tall lady and loved being able to order clothes in tall sizes that actually fit me. 2. I liked shopping from a catalog, because tall sizes are rarely stocked in my local JCP. The majority of the clothes that I wore came from JCP. Tall sizes have almost completely disappeared along with the catalog. It's a sad day now. JCP is struggling and I have to walk around in pants that are 2 inches too short. I'm not very savy when it comes to running a business. But I know what it takes for a business to earn my dollar.

There was a time when we could depend on JCP to carry quality items for people of all ages and employee respectful people. Year,s ago we stopped shopping there because THEY started catering only to the yuppie crowd and younger, and it seemed JCP management thought it necessary to hire only 20 something people with no experience in dealing with people and no understanding of the difference between ages!

JCP will return to its glory days and will not go bankrupt and it will turn out Ron Johnson is not an incompetent severely overpaid fool who should of been fired months ago - he really is a genius who knows what the hell he was doing.